An expert's take

Tom Campbell was a member of President Ronald Reagan's administration when the federal government shut down in 1981. He was a member of Congress, considered a moderate Republican, when the federal government shut down in 1995. He has a Ph.D. in economics and a Harvard law degree, has served as California finance director and is now dean of Chapman University's Fowler School of Law.

Every year, Congress approves appropriations for the next year for each federal agency (with minor exceptions that have multiyear appropriations). If the fiscal year ends without an agency's appropriation being passed, it has to shut down. To prevent a shutdown when individual appropriations bills have not yet been approved, Congress will propose a “continuing resolution” in one big bill, generally with a short time frame.

In the budget showdown of 1995, the Republican Congress passed a series of short-term continuing resolutions funded at the same spending levels as 1994. President Bill Clinton vetoed them, claiming that it was essential for the federal government to spend more than it did the previous year. Though it was the president's veto of those bills that closed the federal government, the Republican Congress was largely blamed for bringing this about – a lesson not lost on the current Republican Congressional leadership, though maybe lost on the rank and file.

Why are we so frequently on the verge of a shutdown recently?

What is at stake has become much more urgent, so differences have sharpened. Last week, the nonpartisan Congressional Budget Office observed: “Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy's annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007.”

Control of Congress, too, has a role. Since 1994, the House has become contestable by the two parties; for the 40 prior years, it was under one-party rule. When control becomes open to change, success is often impeded by the perception that credit will go to the party in power, thereby entrenching it. So each party is less willing to compromise.

What are the political conflicts fueling the possibility of a shutdown?

Republicans in the House see major savings from eliminating the costs of President Barack Obama's health care law. Republicans also see a major political victory by postponing the president's health care law. Building on the president's own unilateral suspension of the obligation on small employers to provide health care, they would make the case that the entire law was rushed through Congress, was not fully thought out, and ought to be postponed across the board.

Congressional Democrats, however, and the president, argue that this is tantamount to an outright repeal, which should not be done through the back door of defunding, or holding up the debt ceiling.

If the government shuts down, what effects would the public be likely to see?

If no appropriations are passed by Oct. 1, when the existing annual appropriations bills terminate, then almost all federal agencies must stop. Among these programs would be federal assistance to states for low-income recipients under Medicaid (in California, Medi-Cal); federal assistance to needy families, federal civilian pay in most agencies, federal low-income housing assistance, military pay, federal assistance to low-income schools and federal employee retirement pay in defined benefit plans. All national parks would close, and many military bases as well.

There are some agencies of government that run under continuing appropriations, however, and these would not be cut: Social Security payments, for instance, and money necessary to prevent disasters, like that allocated to the safety of stored nuclear materials. States would likely make up the difference for some shortfalls, including in Medicaid or transportation projects, but only for a while before their own ability to pay ran out.

If the debt ceiling is not lifted, then about 21 percent of the federal government – the amount funded by borrowing rather than taxes – would have to be cut immediately. The president might try to pick and choose which programs to cut. There is no precedent for the president's authority in this case. He might be tempted to make the cuts in popular programs first, to bring maximum pressure on the Congress. Unlike the appropriations situation, no federal program is exempt from the potential of being included in the 21 percent cut.

What are the arguments for and against raising the debt limit?

Those in favor of raising the debt limit, including President Obama, argue that the government has already agreed to spend the money, so this is merely a question of paying for what we've already “purchased” as a country. Opponents of raising the debt limit argue that if we spend more in some category, we should cut somewhere else to pay for it.

Economically, it matters whether the federal government borrows to pay for what it spends, or taxes to do so. Higher tax rates depress economic activity. Higher borrowing would normally lead to higher interest rates, also with a bad effect on the economy, but the Federal Reserve has been keeping interest rates low through buying bonds from banks (“quantitative easing”), so this effect has not been realized. Hence, those in favor of raising the debt limit argue that it is the best way to finance the federal budget in current economic circumstances.

Those on the other side argue that it would be best of all not to spend beyond our means, and would urge bringing expenditures into line with available resources by cutting federal spending, especially that with little immediate growth stimulus – like foreign wars, or subsidies to wealthy individuals and firms more likely to save than to spend.

Which party looks worse if the government is shut down? What are possible consequences?

Every poll today, and the history of Speaker Newt Gingrich vs. President Clinton in 1995, makes clear the Congress would be blamed for a government shutdown. The Republicans have a real chance to take control of the U.S. Senate, due to the disproportionate number of open seats previously held by Democrats. They will jeopardize that, just as they did in the 1996 elections, by appearing obstructionist. In a battle of popular perception, the president almost always wins over Congress.

How will a partial shutdown affect the average person?

Federal contractors, government retirees, low-income federal educational aid beneficiaries and Medicaid recipients will be at greatest risk because the federal dollars will stop at once for them. We can expect some grandstanding as well, as happened with the sequester, affecting all Americans, such as closing of National Parks, White House tours and military community events.

How will it affect the economy?

A shutdown will be viewed by credit-ranking agencies similar to a debt-ceiling crisis: a reason to doubt the long-run political will in our country to work out difficult fiscal issues.

Will America be defaulting if we don't increase the debt ceiling?

No. President Obama has said that we will be “running out on our tab” if we don't increase the debt ceiling. Actually, America must pay its tab—the amount it owes to those with contracts with the federal government. The debt ceiling deals with new borrowing. If we can't borrow more money, then we'll pay what we owe, but by cutting expenses elsewhere, from those who don't have a contractual right to be paid, or by selling assets. We won't default, but we could cancel welfare payments, or sell some federal land.

Will Orange County be affected any more or less than other places?

The effects on Orange County will be much less particularized than they would have 25 years ago, when U.S. defense contractors made up a substantial part of our local economy. We now have a much more diversified economic base, and we should not hurt any more, or less, than the nation as a whole.

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